The off-payroll working rules: who decides your IR35 status

What are the Off-Payroll Working Rules (IR35)?

The off-payroll working rules (IR35) were introduced to ensure that individuals who work like employees but provide their services through an intermediary (such as a personal service company, or PSC) pay broadly the same Income Tax and National Insurance Contributions (NICs) as regular employees. The aim is to prevent "disguised employment," where a worker might gain tax advantages by operating as a contractor when their working relationship is, in substance, one of employment.

The rules apply on a contract-by-contract basis, meaning you could have some engagements that fall "inside" IR35 and others that fall "outside."

Who Decides Your IR35 Status?

The responsibility for determining IR35 status shifted significantly with reforms introduced in the public sector in 2017 and extended to the private sector in April 2021. The party responsible depends on the client's size and sector.

For Public Sector Clients

If you provide services to a public sector organisation (e.g., a government department, NHS trust, or local authority), the client is always responsible for determining your IR35 status.

For Medium or Large Private Sector Clients

If your client is a medium or large-sized business in the private or voluntary sector, the client is responsible for determining your IR35 status. They must take reasonable care in making this decision and provide you with a Status Determination Statement (SDS). An SDS is a written statement outlining their decision and the reasons behind it.

If the client determines the engagement is "inside IR35," the "fee-payer" (often the client or an agency in the chain) must deduct Income Tax and employee National Insurance contributions from your payments before paying your intermediary. They will also pay employer's National Insurance contributions.

For Small Private Sector Clients

If your client is a "small" business in the private or voluntary sector, the responsibility for determining your IR35 status remains with your intermediary (e.g., your limited company). This is known as the "small companies exemption."

A private sector company is generally considered "small" if it meets two or more of the following conditions for two consecutive financial years (figures for illustration — check current rates):

• Annual turnover not exceeding £15 million (from 1 April 2025 for accounting periods starting on or after this date; previously £10.2 million).
• Balance sheet total not more than £7.5 million (from 1 April 2025 for accounting periods starting on or after this date; previously £5.1 million).
• No more than 50 employees.

If your client is small, you, as the contractor operating through your intermediary, are responsible for assessing your own IR35 status and accounting for the correct tax under Self Assessment if the rules apply.

Factors Determining IR35 Status

When assessing IR35 status, the overall working relationship between you and your client is considered, not just the contract wording. Key factors include:

• Control: The extent to which the client controls what, when, where, and how you do your work. High control suggests employment.
• Substitution: Whether you have an unfettered right to send a substitute to perform the work in your place. A genuine right of substitution points towards self-employment.
• Mutuality of Obligation (MOO): Whether the client is obliged to offer you work and you are obliged to accept it. A continuous obligation suggests employment.
• Financial Risk: Do you bear financial risk, such as having to correct unsatisfactory work at your own expense?
• Provision of Equipment: Do you use your own equipment or the client's?
• Integration: How integrated are you into the client's organisation? For example, do you attend staff meetings, have an employee email address, or receive staff benefits?
• "In Business on Your Own Account": Do you have other clients, a business website, professional insurance, and generally operate as an independent business?

HMRC provides an online tool called "Check Employment Status for Tax (CEST)" to help determine status. While HMRC states it will stand by the results if the information entered is accurate, the tool has faced criticism and may not always provide a definitive answer.

Common mistakes

• Assuming IR35 doesn't apply: Many contractors mistakenly believe IR35 is only for large companies or specific industries. It applies to any engagement through an intermediary where the underlying relationship is one of employment.
• Relying solely on contract wording: While the contract is important, HMRC will also examine actual working practices. If the reality of the work differs from the contract, the working practices will take precedence.
• Not obtaining a Status Determination Statement (SDS): If your client is medium or large, they must provide you with an SDS. Not receiving or requesting one can lead to confusion and potential issues.
• Ignoring the small business exemption: Contractors working for small private sector clients are still responsible for their own IR35 status determination, even if they previously worked for larger clients where the client made the decision.
• Blanket determinations: Clients making a single IR35 decision for all contractors without assessing each role individually are not taking reasonable care and risk HMRC penalties.